07ASTANA173, KAZAKHSTAN: 2007 INVESTMENT CLIMATE STATEMENT

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Reference ID Created Released Classification Origin
07ASTANA173 2007-01-19 13:50 2011-08-30 01:44 UNCLASSIFIED Embassy Astana

VZCZCXYZ0000
RR RUEHWEB

DE RUEHTA #0173/01 0191350
ZNR UUUUU ZZH
R 191350Z JAN 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 8225
INFO RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS ASTANA 000173 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/IFD/OIA 
STATE PLEASE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR KZ
SUBJECT: KAZAKHSTAN: 2007 INVESTMENT CLIMATE STATEMENT 
 
REF: 06 STATE 178303 
 
1. The following information is provided in response to 
reftel request. 
 
Openness to Foreign Investment 
------------------------------ 
 
Kazakhstan has made significant progress toward creating 
a market economy since its independence in 1991.  The 
European Union in 2000 and the U.S. Department of 
Commerce in March 2002 recognized the success of 
Kazakhstan's reforms by granting it market economy 
status.  Kazakhstan also has attracted significant 
foreign investment since independence.  By July 2006, 
foreign investors had invested a total of about $46.2 
billion in Kazakhstan, primarily in the oil and gas 
sector, during the country's fifteen years of 
independence.  Following independence, the government 
created a favorable regime for oil and gas investments at 
the same time that it undertook other liberalizing 
economic measures and began an ambitious privatization 
program. 
 
Despite continuously increasing investment into 
Kazakhstan?s energy sector, concerns remain about a 
tendency on the part of the government to challenge 
contractual rights, to legislate preferences for domestic 
companies, and to create mechanisms for government 
intervention in foreign companies' operations, 
particularly procurement decisions.  Together with vague 
and contradictory legal provisions that are often 
arbitrarily and inconsistently enforced, these negative 
tendencies feed an enduring perception that Kazakhstan is 
becoming less open to investment. 
 
Four major pieces of existing legislation affect foreign 
investment.  These are: 1) the 2003 law "On Investment?; 
2) the 1997 law ?On Government Procurement;? 3) the 2001 
Tax Code; and 4) the 2003 Customs Code.  These four laws 
provide for non-expropriation; currency convertibility; 
guarantees of stability in the legal regime; transparent 
government procurement; and incentives in certain 
priority sectors, including electrical infrastructure, 
telecommunications, light manufacturing, health and 
tourism.  However, inconsistent implementation of these 
laws and reforms at all levels of government remains the 
key obstacle to business in Kazakhstan. 
 
Since 1997, there has been a growing trend to favor 
domestic investors over foreigners in most state 
contracts.  Furthermore, amendments passed in 1999 to the 
Oil and Gas Law require mining and oil companies to use 
local goods and services.  According to these ?local 
content? regulations, subsurface users in Kazakhstan are 
obligated to purchase goods and services from Kazakhstan 
entities -- provided that the local goods meet minimum 
project standards -- and to give preference to the 
employment of local personnel.  Prospective subsurface 
users are required to specify in their tenders the 
anticipated local content of their work, goods, and 
services.  Since 2002, a designated government body must 
approve all tender documents, participate in tender 
committees, and approve all tender committee decisions, 
in order to ensure compliance.  The 2005 ?Production 
Sharing Agreements (PSA)? law, which applies primarily to 
Kazakhstan?s offshore oil development projects, binds 
companies to similar local context provisions. 
Amendments to the Subsurface Law adopted in December 2006 
further tighten the government?s application of local 
content requirements, requiring companies to meet local 
content benchmarks annually, rather than on average over 
the lifetime of a project. 
 
These requirements are being challenged in connection 
with Kazakhstan's forthcoming WTO accession negotiations, 
as they appear to breach GATT and GATS rules and the 
Agreement on Trade Related Investment Measures.  They 
also appear to contradict the 1994 U.S.-Kazakhstan 
Bilateral Investment Treaty, which states in Article II, 
paragraph 5, that "neither party shall impose performance 
requirements...which specify that goods be purchased 
locally..." 
 
In January 2003 President Nazarbayev signed a new law "On 
Investments" that superseded and consolidated past 
legislation governing foreign investment.  The law 
establishes a single investment regime for domestic and 
foreign investors, and provides, inter alia, guarantees 
of national treatment and non-discrimination for foreign 
investors.  It guarantees the stability of existing 
contracts, with the qualification that new ones will be 
subject to amendments in domestic legislation, certain 
provisions of international treaties, and domestic laws 
dealing with "national and ecological security, health 
and ethics." 
 
The 2003 law provides for dispute settlement through 
negotiation, Kazakhstan's judicial process, and 
international arbitration.  However, the law narrows the 
definition of investment disputes and lacks clear 
mechanisms for access to international arbitration.  U.S. 
investors should note that the U.S.-Kazakhstan Bilateral 
Investment T
reaty, as well as the New York Convention, 
protect U.S. investor access to international 
arbitration.  Additionally, the RK Constitution, as well 
as the 2003 law "On Investments," specifies that ratified 
international agreements have precedence over domestic 
law.  The May 2005 Law on International Agreements 
appears to contradict this legal hierarchy, setting 
precedence of domestic law of the RK over its 
international agreements.  For the purpose of eliminating 
this contradiction from the law, the Parliament has 
recently passed amendments to the Law on International 
Agreements that re-state the precedence set by the 
Constitution of ratified international agreements over 
domestic law.  The amendments will become effective once 
they are signed by President Nazarbayev.  Finally, in 
December 2004 Kazakhstan adopted a law ?On International 
Commercial Arbitration? (see ?Dispute Settlement? for 
full discussion). 
 
The 2003 law contains investment incentives and 
preferences based on government-determined sectoral 
priorities, and provides for investment tax preferences, 
customs duties exemption

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